How to Figure Deprecation on Products for Resale
Under U.S. accounting laws, accountants must record physical assets, such as vehicles or equipment, at historical cost, i.e., the purchase price. Over time, many physical assets lose value due to time and wear. Accountants use deprecation equations to record the loss incrementally over time. Assets depreciate at the same rate regardless of whether the asset is intended for resale.
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Instructions
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Record the historical cost of the asset, i.e., the amount the company paid for the product. This is your starting point.
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Determine the useful life of the product. This is how long the product can be used for its intended purpose before it wears out or breaks down. Useful life can be reported in units of time (months and years), activity (hours in operation, miles driven) or output (items produced).
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Determine the salvage value of the product. This is what the product is worth as scrap at the end of its useful life. Even products intended for resale have a salvage value.
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Subtract the salvage value from the historical cost. The resulting amount is the depreciable cost.
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Divide the depreciable cost by the product's useful life. This gives you the amount by which the product depreciates per unit of useful life. If the useful life is measured in years, this gives you the amount of value the product loses per year. If the useful life is measured in miles, this gives you the amount of value the product loses per mile, for example.
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Create a deprecation schedule in line with the business's accounting timetable. Match the deprecation per unit of use to the accounting timetable. For example, if the business's accounting timetable is quarterly, figure the deprecation per quarter.
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Subtract the deprecation amount from the historical cost according to your deprecation schedule. When you're ready to resell the product, consider the current value as figured with accumulated depreciation.
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References
- Accounting Coach: Depreciation
- "Financial Accounting, Sixth Edition"; Jerry J. Weygandt, et al; 2008
- IRS: A Brief Overview of Depreciation
